How to calculate, understand and use LTV metric for apps

App monetization is closely connected to app performance. Measuring and understanding it on all stages of the funnel is what app developers should do to achieve the best results. The key metrics that help to put your app into perspective are retention rate, sticky factor, and churn rate. However, there is also a definitive metric that connects them all. It shows their interdependence and links the top of the funnel (user acquisition and ad spend) to its bottom (user conversion and app monetization). LTV is arguably the most important calculation in the app analytics. Let’s dive into the LTV metric and discover how it can be useful for optimizing your revenue flow.

Getting definitions right: what is LTV?

The lifetime value is the total amount of revenue that one user generates in a period of time. In simple terms, LTV is how much worth one user can give you. It’s a truly universal metric, used by all kinds of businesses to perfect product development, marketing, sales and even customer service. However, for app developers, the approach to the calculation of LTV is a bit more specific and depends on the business model of the app. For paid apps, the calculation will work around the cost of install; for freemium and subscription apps – user conversions and for free apps that monetize via in-app ads, the focus is on user engagement and churn. Connecting the dots of the app monetization strategy, LTV can be used to assess revenue flow and forecast growth.

How to calculate LTV?

There are two key notions that make up the LTV metric. The first of them is Revenue, or ARPU (average revenue per user). This depends on the business model of the app, as it was mentioned before. LTV calculation can include profit from ad impressions, in-app purchases, subscriptions, either separately or combined, if the app developer uses several monetization options.

The next notion is User engagement, expressed as retention rate or churn rate. The analysis of how long user stay in the app, what they do, whether they engage with the application and how frequently they come back within a period of time is essential for calculating lifetime value. The general formula of app user LTV would be the following:

LTV = ARPU + 1/Churn

It’s important to note that LTV is calculated for a period of time, so there is a possibility to compare time periods and track the progress of the app over time.

In addition, there is also a third notion, which is sometimes included in the calculations. Virality is the referral power of the user. That is the potential value of the audience that each user can refer to the app. It’s hard to verifiably track virality, that is why most marketers prefer to leave it out of the function. However, for advanced understanding of user LTV, virality is indeed useful. Another step ahead would be to segment the audience by the channel of acquisition, performed in-app actions, geo, demographics or other characteristics and calculate LTV separately for each group. In this way, you can develop a more flexible approach, test hypotheses and make changes to your monetization strategy, personalized for each audience segment.

Understand the lifetime value. Key insights to get from LTV

Having calculated LTV, you can find answers to several important questions.

Do you have a viable monetization strategy?

An increasing revenue inflow is a good sign, but it doesn’t necessarily mean that the app has a strong strategy long-term. Without the context, revenue increase can be misleading. If attracting new users is the growth point of the app, but app fails to retain them – it’s a sure sign of a growth bubble, which might burst once the steady increase of new users stops. A balanced strategy takes into account the retention rate, as well as user acquisition, and focuses on keeping every user return to the app. Thus, app developers can see a better return on advertising spend (ROAS) and eventually, bigger LTV compared to the cost of user acquisition.

Do you attract the right users?

Another major insight that only LTV can reveal is the ultimate value of your user acquisition. With the cost and effort, which goes into attracting new users, it’s a waste to lose them shortly after the install, before they meet all the revenue-generating potential. Using LTV to assess the user behavior, you can discover which channel delivers the best users. The ones, who spend the most time in the app, convert into customers and contribute the biggest part of the revenue. At the same time, it’s possible to track down unreliable sources, which supply poor quality traffic and users that quickly churn. By focusing more on top-performing channels and blacklisting the ones bringing no value, you’ll be able to maximize user acquisition.

Do you pay the right amount for user acquisition?

Finally, if the LTV of one user is less than the amount spent on acquisition (CAC – customer acquisition cost), it’s a signal to review your spending. For the app to be profitable, CAC needs to always be lower than LTV. Keeping track of both metrics allows to optimize the quality of in-app traffic and focus on engaging users.

Conclusions

Use LTV to find issues with your app and monetization strategy. These insights will help you to create a more well-rounded approach to monetization, which considers user engagement, user acquisition, conversion and churn rates. Tracking the changes of LTV over a period of time, you’ll be able to make necessary optimizations and, eventually, earn more.

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